The Impact of Executive Compensation Incentives on Corporate Performance: A Study of Externally Recruited Top Management

In China’s competitive talent market, externally recruited executives (“parachuted executives”) play a pivotal role in shaping corporate performance, with compensation incentives serving as a critical tool for talent acquisition and retention. This study investigates how salary structures (base pay, bonuses, equity incentives) and compensation growth rates impact operational outcomes in Chinese firms and multinational subsidiaries. While prior research predominantly relies on static, CEO-centric public data, this analysis leverages proprietary datas from a human resource company’s records (2018–2023) of 378 companies and 559 executives to address three limitations: (1) overreliance on publicly disclosed CEO compensation, (2) exclusion of mid-level managers and technical leaders, and (3) inability to track pre-hiring compensation dynamics.Compensation design is influenced by industry characteristics, regulatory constraints, corporate governance quality, and controllers’ strategic priorities. Using ROA and ROE as performance metrics, with controls for firm size, leverage, ownership structure, and regional factors, this study introduces three innovations: First, non-public compensation data enables granular analysis of salary components and equity vesting schedules. Second, expanding the executive scope to include operational managers reveals their disproportionate impact on performance. Third, dynamic tracking of compensation adjustments during recruitment identifies incentive alignment mechanisms.
The results show that equity incentives are most strongly associated with performance, having a negative effect on firm performance in the 2-year dimension. This ‘incentive failure’ may stem from the mismatch between equity incentives and the performance appraisal mechanism. When parachuted executives’ total compensation increases compared to predecessors, their career stability increases, revealing that compensation comparability enhances retention intentions. Top executives respond more to performance-linked bonuses than middle managers, confirming the need to expand analysis scope.
These findings advance compensation theory by redefining talent market alignment mechanisms in transition economies. They guide employers, managers, and the HR market to better fulfil their roles. For MNC subsidiaries in China, these insights are valuable for dealing with local talent competition. By balancing short-term rewards with long-term incentives, companies can improve immediate performance and sustained competitiveness.